Revenue Features of Multiple Exchange Rate Systems: Some Case Studies

THE USUAL PURPOSE of multiple exchange rates is to cope with over-all balance of payments problems. Sometimes, e.g., when multiple rates are designed to deal with problems of particular exports or the relative holdings of various currencies, they may have a direct effect on these problems. But when they are designed to reduce or to counteract internal inflationary pressure, they may have an indirect effect. If multiple rates are to produce such an anti-inflationary effect, they must yield revenue or exchange profits. Frequently, indeed, the raising of revenue is a specific secondary purpose of a multiple rate practice; but in any case, irrespective of the purpose, the result often is an increase of revenue.


THE USUAL PURPOSE of multiple exchange rates is to cope with over-all balance of payments problems. Sometimes, e.g., when multiple rates are designed to deal with problems of particular exports or the relative holdings of various currencies, they may have a direct effect on these problems. But when they are designed to reduce or to counteract internal inflationary pressure, they may have an indirect effect. If multiple rates are to produce such an anti-inflationary effect, they must yield revenue or exchange profits. Frequently, indeed, the raising of revenue is a specific secondary purpose of a multiple rate practice; but in any case, irrespective of the purpose, the result often is an increase of revenue.

THE USUAL PURPOSE of multiple exchange rates is to cope with over-all balance of payments problems. Sometimes, e.g., when multiple rates are designed to deal with problems of particular exports or the relative holdings of various currencies, they may have a direct effect on these problems. But when they are designed to reduce or to counteract internal inflationary pressure, they may have an indirect effect. If multiple rates are to produce such an anti-inflationary effect, they must yield revenue or exchange profits. Frequently, indeed, the raising of revenue is a specific secondary purpose of a multiple rate practice; but in any case, irrespective of the purpose, the result often is an increase of revenue.

The revenue aspects of multiple currency practices are examined in this paper with a view to finding answers to such questions as the following: Are exchange profits or revenue derived from multiple rates a major or a minor source of total revenue? To what uses are exchange profits usually put? Do they become part of general budgetary revenue or are they earmarked for special uses? What alternative sources of revenue might best be substituted for exchange profits? How much fiscal reform might be needed to make it unnecessary to derive revenue from exchange systems? What considerations are involved in such fiscal reform?

General answers to some of these questions have tended to emerge in recent years as a result of the increasingly close contacts of the International Monetary Fund with members employing multiple currency practices. However, a detailed empirical investigation of the actual exchange and fiscal situations of individual countries should make possible more specific answers and provide a firmer foundation for some of the generalizations commonly made.

In selecting countries for such a study, several considerations have been kept in mind. First, the exchange system must give rise to revenue. Peru’s dual free market, for example, would not be relevant for the purposes of this study, since it yields no revenue.

Second, it must be possible to calculate fairly readily the exchange profit involved in the multiple exchange system. For many countries with complicated multiple rate systems that probably yield a significant volume of revenue, it is impossible to determine with any certainty the magnitude of the revenue, since detailed information on the purchases and sales of exchange transacted at all the various rates is not available.

Third, the countries should be selected so as to illustrate the effect of different types of multiple currency system, e.g., exchange tax, surcharge, fixed exchange spread, and penalty export rate.

With these considerations in mind, the exchange systems of four countries—Cuba, Nicaragua, the Philippine Republic, and Venezuela—are examined in some detail in this paper. Their systems are comparatively simple, and the revenue earned is easily discernible. Cuba has a small exchange tax, and the Philippine Republic a large tax;1 Nicaragua obtains revenue through the use of an exchange spread and, until July 1955, also obtained revenue through the use of surcharges; Venezuela realizes revenue from the sale of exchange purchased at a penalty export rate. Moreover, in each of these countries, the revenue earned is, or has been, an important practical consideration in determining whether multiple currency practices should be retained.

Cuba: Small Exchange Tax

Practically the only deviation in Cuba from an unrestricted international payments system and a unitary exchange rate is a 2 per cent tax imposed on most sales of exchange and on exports of securities. Although Cuba also has special payments arrangements with France, Spain, Mainland China, and North Korea, and a new exchange control law became effective in January 1953, the 2 per cent tax continues to be one of the most important features of its exchange control system.

When the exchange tax was established in 1925, it was levied at the rate of 0.25 per cent on all money or its equivalent exported from Cuba. In September 1941, the rate was raised to 0.3 per cent and in December 1941 to 1 per cent. In 1943 the tax was further increased to 2 per cent, where it has since remained. The last two changes were effected simultaneously with other tax increases to meet anticipated increases in expenditures, particularly those attributable to World War II.

The tax applies essentially to all payments abroad except payments by tourists and diplomats, the repatriation of specified foreign capital, and government transactions. It is collected by the commercial banks at the time exchange is sold. It is also levied on the value of those exports the proceeds from which are not returned to Cuba, i.e., it is a tax on the nonrepatriation of export earnings. If a bank bond guaranteeing the return of the proceeds to Cuba is posted, the tax does not have to be paid at the time of export; but if no such bond is posted, the tax is collected by the customs houses.

The tax was originally imposed by the Public Works Law of 1925 and, together with other taxes, was designed to provide revenue principally for a special public works fund. Receipts from the tax are now utilized for general government expenditure, except that one eighth of the proceeds, i.e., an amount corresponding to the original tax of 0.25 per cent, is earmarked specifically for payments on the Public Works Loan of 1937–47.

Until recently, it had never been argued that the exchange tax served any other purpose than to increase government revenue, although it may also have had some incidental effect in reducing imports and capital exports. However, since 1952, when there was a substantial deficit in the balance of payments, the balance of payments effects of the tax have tended to receive more attention.

At first sight, an exchange tax of 2 per cent seems unlikely to be an important revenue producer in Cuba’s total revenue system. In a country with a tax system that includes several indirect import and consumption taxes, the importance of any individual tax may, however, not be indicated accurately by the absolute amount of revenue raised by it. The wide diversity of revenue sources in Cuba and the magnitude of revenue from these sources are indicated by the data in Table 1; but since some of the government receipts are set aside (outside the budget) for autonomous agencies, retirement funds, etc., the figures do not include all government receipts. Receipts from the exchange tax (tax on export of money) for the fiscal year 1953–54 were about 11 million pesos. In the last four fiscal years, they have been fairly constant, varying between 11 million and 17 million pesos. Total budget receipts in 1953–54 were 271 million pesos. Thus, in that year the receipts from the 2 per cent tax constituted only about 4 per cent of total budget receipts. Even in comparison with other important revenue sources, the exchange tax does not rank very high. In 1953–54, receipts from the 2 per cent tax were equivalent to less than 20 per cent of the receipts from customs duties and charges.

Table 1.

Budget Revenues of the Government of Cuba, Fiscal Years 1951–541

(In millions of pesos)

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Sources: Tribunal de Cuentas, Havana, and Revista del Banco Nacional de Cuba (Havana), August 1955.

Totals may not equal the sums of the items because of rounding.

However, the exchange tax was a more important source of revenue than the income tax until 1953–54, when the revenue from both sources was almost the same; and there are numerous small taxes, such as the excises on tobacco, sugar, and liquor, real estate taxes, excess profits taxes, the inheritance tax, motor vehicle license fees, etc., which have not yielded nearly as much as the 2 per cent exchange tax.

Several studies of the Cuban fiscal system have already recommended the abolition of the exchange tax, or at least of some of its applications. Its abolition was among the recommendations made by Seligman and Shoup in 1932, and again by Magill and Shoup in 1939.2 In view of Cuba’s budget situation and its need for revenue, the exchange tax could probably not be eliminated unless some alternative source could be found to replace the revenue presently earned through the exchange system. An examination of Cuba’s present fiscal system suggests that the most suitable method of increasing revenue probably requires a fairly comprehensive fiscal or administrative reform. The principles of budgetary expenditure policy scarcely fall within the scope of the present paper, and, in any event, the Cuban Government has recently been concerned with the problems of a budget deficit. There were substantial deficits in the fiscal years 1952–53 and 1953–54, but it is reported that the deficit in 1954–55 was small.3 Fluctuations in the world sugar situation may also create a need, from time to time, for larger revenues in Cuba. In recent years, when sugar has been in surplus, the Government has undertaken to hold stocks and to help maintain the income of sugar producers. Increased revenue has also been required for additional public works, which have been undertaken to maintain employment when restrictions have been placed on sugar production. In considering the problem of eliminating the exchange tax, attention should therefore be directed first to the possibility of raising additional revenue from other sources.

In the absence of a comprehensive fiscal or administrative reform, an increase in revenue from the present tax structure of Cuba could probably be attained only by raising import or consumption taxes or by imposing additional small taxes. Studies of the Cuban fiscal system suggest, however, that these might not be satisfactory alternatives. According to a report on Cuba by a mission from the International Bank for Reconstruction and Development, about two thirds of the total tax yield until the beginning of the 1940’s was from consumption and import taxes, while direct taxes provided only about 5 or 6 per cent.4 In recent years, there has been an attempt to reduce reliance on consumption taxes. Direct taxation was substantially increased in the 1940’s, and revenue from this source has since increased slightly but steadily. Nevertheless, indirect taxes still account for almost 70 per cent of total revenue, and consumption taxes, a hang-over from colonial times, continue to bulk large in the Cuban fiscal system.

The IBRD mission indeed suggested that, since 80 to 90 per cent of the yield of the 2 per cent tax is derived from transfers of money to pay for merchandise, it might be replaced by a moderate import surcharge yielding a similar amount.5 The objections of the Cuban authorities to this suggestion seem to be largely of a political nature. As the exchange tax has been in effect since 1925, people have become accustomed to it and the authorities hesitate to make a change. The desirability of using the tariff as a substitute for an exchange tax is not discussed in this paper, but, as far as the exchange system is concerned, the effects of tariff surcharges are little, if at all, different from those of an exchange tax. The Cuban tariff, based on a decree of 1927 and subsequent modifications, underwent substantial alteration in 1952. The basis for further revision was laid in February 1955, when the Executive was authorized to revise customs nomenclature, to change merchandise classifications, and to simplify the determination and application of the classifications.

The present Cuban tax system already contains an excessive number of small taxes. Both a report of Price, Waterhouse & Co. in 1950 and that of the IBRD mission in 1951 considered the large number of taxes to be one of the main weaknesses of the tax system. Legal requirements and the tendency to create a new tax whenever the need arises for new expenditure have been the main causes of the large number of taxes. According to the IBRD mission report, officials in Cuba are aware of the difficulty of enforcing such an intricate system, and the elimination of a number of taxes, especially those with low yields, is part of current plans for fiscal reform.

Additional revenue might be raised by the more efficient enforcement of direct taxes, and particularly of the income tax. In the fiscal year 1953–54, income tax receipts from direct contributions, which tend to come from the middle and upper income groups, were less than receipts through the medium of a withholding tax, which are paid mainly by people in the lower income brackets. (Of the total income tax receipts, 5.76 million pesos was from direct contributions and 5.85 million was paid on a withholding basis.) While estimated national income increased from 1,651 million pesos in 1948 to 1,715 million pesos in 1954, revenue from the income tax paid by direct contribution declined from 6.5 million pesos in fiscal 1948 to 5.8 million pesos in fiscal 1954.6 The larger number of taxpayers in the lower income groups might be thought to account for this seeming anomaly, but widespread evasion is also suggested by figures indicating that only about 20,000 people pay income taxes directly (in addition to those from whose wages and salaries the tax is withheld), while 80,000 file profits tax returns.7 It seems probable that most of those who file profits tax returns earn at least the minimum annual income for which an income tax return should also be filed.

With a view to increasing direct income tax receipts, a law passed in 1952 required, inter alia, that any person wishing to transfer property or to leave Cuba had first to produce proof of payment of income tax. Later, the law was modified to the extent of requiring from a person leaving Cuba only a declaration that he had fulfilled his income tax obligations. In June 1954 a new law was enacted modifying the basic income tax law in an attempt to reduce evasion. The major provisions of this law were extension of the withholding system to income from agriculture, livestock raising, mercantile industry, and financial activities; establishment of a taxpayers’ identity card system making it obligatory, when performing certain legal and financial acts, or when departing from Cuba, to furnish evidence of having filed an income tax return; and provision for increased penalties for income tax fraud including, for the first time in Cuba, imprisonment for second repeaters.

These and other legislative acts indicate that the Cuban authorities are putting into effect some of the recommendations made in earlier reports on the Cuban fiscal system. There have been some increases in direct taxes, and regulations have been more rigorously enforced. Transportation, business, personal income, luxury, and property taxes have been raised in recent years, and in 1951 various taxes paid by small businesses were consolidated in an effort to make enforcement easier. Regulations were issued in 1954 for the implementation of a law passed in 1951 for the purpose of improving accounting methods and facilitating the work of the Tribunal of Accounts in supervising national fiscal operations. Many of the tax increases, however, have been of the type which has become common in Cuba, the proceeds being earmarked for some specific purpose.

Although budgetary revenue in 1952–53 was nearly double that in 1945, there was nevertheless an over-all deficit. In 1951–52 and 1952–53 the yield from taxes on capital and profits and from income taxes exceeded the yield in 1950–51 by more than the yield of the exchange tax. But as the increased tax yields were all intended to meet increased expenditures, the prospects for removing the exchange tax were in no way changed. In 1953–54 the position was even less promising, for government revenue declined sharply, primarily because of the general effects of the cut in sugar production, and there was again a budget deficit.

These facts suggest that, if the exchange tax is to be eliminated, either much larger revenues are required or some check will have to be placed on expenditures. Although attention should perhaps be paid to the possibilities of obtaining larger revenues, particularly in the long run, the extent to which expenditures might be reduced would have to receive more serious consideration.

Balance of payments considerations

Since Cuba has had frequent balance of payments surpluses in recent years, it might have seemed a convenient time to remove the 2 per cent exchange tax. In 1949, 1950, and 1951 there were active balances. Although the trade balance continued to be active in 1952, it was too small to offset the customary deficit on invisible items and there was a substantial balance of payments deficit; but the position was again favorable in 1953.

In view of its dependence on the world sugar situation, the Cuban balance of payments is rather vulnerable, and therefore the balance of payments effects of the exchange tax deserve attention. In principle the tax should serve, to some extent, as a check on capital outflow and thus as a factor in strengthening the balance of payments; and it might also reduce imports a little. The extent to which these effects are in fact realized may be questioned, however. Certain marginal importers may import less but, in view of the smallness of the tax, the effective reduction is probably not large, and some evasion of the tax on export proceeds not repatriated has been reported.

The administration of the collection of the tax has been modified in an effort to reduce evasion. Under Law-Decree No. 591 of December 17, 1952, the exchange of national currency for foreign currency is presumed equivalent to exportation and is therefore subject to the tax. The tax was further regulated by Decree No. 928 of April 10, 1953; among other things, this Decree abrogated the exemption of 50 pesos for travelers and included receipts of foreign currency in Cuba and any transfers of funds held abroad by Cuban nationals, whether to foreigners or to other Cubans, among transactions subject to the tax. Although the last provision may be difficult to enforce, these recent acts indicate tightened enforcement of the law, and they could be expected to tend to reduce capital exports and therefore to have a favorable effect on the balance of payments.

It is possible that the tax has some detrimental effects on foreign investment in Cuba. Until recently, the tax was paid on foreign capital being repatriated just as it was paid on any other outgoing capital, and this tended to discourage the entry of capital. Action was taken in November 1952 to alleviate this disadvantage, by exempting from the tax the repatriation of investments in industrial, agricultural, or other enterprises or their securities which have been registered with the National Bank of Cuba.8 The exemption was also extended to capital equipment when re-exported. This removes the disability imposed on foreign investors who invested capital in Cuba at the rate of 1.00 peso per U.S. dollar, but who could withdraw it only at the rate of 1.02 pesos per U.S. dollar. However, the tax still applies to profits repatriated and may, therefore, still be a deterrent to investment. This might be insignificant for investments that can be assured of a substantial return, but investors might hesitate where more risk is involved.

Nicaragua: Surcharges and Exchange Spread

The exchange system maintained in Nicaragua from November 9, 1950 until July 1, 1955 provided for two official exchange rates (C$5 and C$7 per U.S. dollar) and two surcharges (one on semiessential and one on nonessential imports). When this system was introduced, revenue purposes were of minor importance, although the provision of exchange for government purchases at the preferential rate of C$5 was intended to diminish the revenue requirements of the Government, and it was also expected that the surcharges would absorb some of the current monetary income. There was a spread of C$0.40 between the selling rate of C$7.00 per U. S. dollar and the effective buying rate of C$6.60. This spread, however, did not at first produce any net revenue. The effective buying rate was the result of a mixing arrangement whereby 20 per cent of the export proceeds was purchased by the National Bank at C$5 per dollar and 80 per cent at C$7. However, half of the proceeds of the portion purchased at the C$5 rate was allocated to government payments, and the other half was earmarked for sale at the same rate for the liquidation of commercial arrears. As long as each of these two demands for exchange was large enough to absorb 10 per cent of total exchange receipts, no exchange profits were to be expected; but if any profits should in fact arise, they were to be allotted to a special Exchange Equalization Fund. The proceeds from the surcharges were intended to serve anti-inflationary purposes, 20 per cent being used for retirement of government debt held by the National Bank and the remainder being sterilized; revenue from this source was not to be included in the budget.

In the course of time, however, the revenue aspects of these exchange practices became more important, and the Nicaraguan authorities stated that the removal of the surcharges would require a fiscal and tariff reform. As development projects were undertaken, there was an intensified need for additional revenue, and the accumulated proceeds from surcharges began to be used for this purpose. Before 1952–53 the proceeds were retained for the special purposes originally allotted to them; but in the 1952–53 budget, for the first time, estimates of surcharge proceeds were formally included,9 and some of the funds were earmarked for such development projects as the construction of highways and of grain storage elevators. It was planned to spend the amount earmarked for highway development gradually over a three-year period. Since 1952 some of the accumulated surcharge proceeds were also used to capitalize the new National Institute for Economic Development. As commercial arrears were liquidated during 1952, the preferential rate of C$5 began to be used principally for government payments. There was no revenue from the exchange spread until 1952, but in that year it, too, became a source of revenue, when the foreign exchange no longer needed for repayment of arrears could be sold at a profit at the C$7 rate. Important revenue-producing elements thus appeared in Nicaragua’s exchange system—the exchange profit derived from the spread and the surcharges on semiessential and nonessential imports.

Nature and magnitude of the revenue from the exchange system10

Up to July 1955, imports were divided into three categories, to all of which the C$7 exchange rate applied, plus surcharges of C$1 for List II imports (semiessentials) and C$3 for List III (nonessentials). The value of the imports covered by List II and List III (US$9.7 million in 1952, US$10.5 million in 1953, and US$12.1 million in 1954)11 constituted in recent years about 25 per cent of Nicaragua’s total imports. In addition, invisibles, with certain specified exceptions, were subject to a surcharge of C$3 per U.S. dollar on any official exchange purchased for these transactions. But since the effective free market rate was less than the official rate plus the surcharge, persons requiring exchange for invisibles usually obtained it in the free market, and for that reason there was no revenue from surcharges on invisibles.

Although, for reasons outlined above, the spread of C$0.40 between the effective buying rate of C$6.60 per U.S. dollar and the selling rate of C$7.00 produced no exchange profit, the spread had a revenue significance as long as allocations of exchange at the C$5 rate were maintained; viz., the preferential rate for government purchases reduced the Government’s requirements of local currency. After the repayment of commercial arrears was completed, the spread also produced an actual exchange profit.

A 5 per cent tax collected by the National Bank on sales of official exchange for invisibles could be regarded as another part of the Nicaraguan exchange system. Like the surcharge on invisibles, however, this tax probably yielded no revenue, since exchange for most invisibles was in practice purchased in the free market.

The surcharges on imports from November 1950 to the end of 1951 are reported to have amounted to C$16.7 million. For 1952–54, they maybe estimated as follows: 1952, C$16.1 million, 1953, C$19.1 million, and 1954, C$21.7 million.12 These estimates for 1952 and 1953, together with the figure reported for the period from November 1950 to the end of 1951, correspond sufficiently closely to the figure of C$54.5 million reported by the President of Nicaragua as the total yield from surcharges to the end of 195313 to justify a fair measure of confidence in the estimate for 1954. The addition of this estimate to the President’s figure brings the total to C$76.2 million.

The revenue potentially available from the exchange spread may be estimated as follows. In 1952 the total exchange receipts of the National Bank were US$43 million. Twenty per cent (or US$8.6 million) was purchased at the rate of C$5 per U.S. dollar, and it was possible, in principle, to make a “profit” of C$17.2 million by selling this exchange at the rate of C$7 per dollar. Sales of exchange for government purchases at the C$5 rate, however, amounted to US$4 million and for liquidation of commercial arrears to US$300,000. Since there was no “profit” on these sales, the total “profit” from the spread was thus reduced to C$8.6 million.

In 1953 total exchange receipts were US$47.4 million, and sales of exchange for government purchases at the C$5 rate are reported at US$4.6 million; in 1954 the corresponding figures were US$55.5 million and US$5.6 million.14 Calculations similar to those used for 1952 therefore give a “profit” from the spread of about C$9.8 million in 1953 and C$11 million in 1954.

Actual profits were somewhat less than these estimates, since foreign exchange reserves were accumulated in 1952 and 1953 and to that extent the realization of exchange profit was postponed. The increase in reserves in 1952 was US$6.2 million, and in 1953 it was US$1.2 million. In 1954 foreign exchange reserves were reduced by US$3.0 million. These movements meant that the exchange profit would be less than the estimate by C$2.5 million in 1952, and by C$0.5 million in 1953, but that in 1954 it would exceed the estimate by C$1.2 million. The total estimated revenue derived from Nicaragua’s exchange system is summarized in Table 2.

Table 2.

Estimates of Total Revenue Derived from Nicaragua’s Exchange System, Calendar Years 1952–54

(In millions of córdobas)

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If the Government had had to pay C$7 per U.S. dollar for the exchange that it purchased at the preferential rate in 1952, 1953, and 1954, its expenditure on foreign exchange would have been increased by about C$28.4 million (C$8 million in 1952, C$9.2 million in 1953, and C$11.2 million in 1954). In all, the potential revenue benefits of the exchange system as a whole therefore amounted to about C$30–40 million a year.

Comparison with other sources of revenue

The estimated revenue from the exchange system for the calendar year 1953 was 14 per cent of the total revenue estimated for the fiscal year 1953–54; and the estimate for 1954 was a slightly higher percentage of estimated budget receipts for 1954–55. A reform of the exchange system which would remove such a large producer of revenue therefore required other significant changes in the tax system.

A mission from the International Bank for Reconstruction and Development, after a visit to Nicaragua in 1952, had recommended the introduction of an income tax, an increase in rates for the property tax and an improvement in its collection, and a review of all other sources of internal revenue and of the customs tariff.15 The object of these recommendations was to reduce indirect taxes, to abolish taxes with disproportionately high collection costs, and to simplify the tax system by consolidating different taxes and duties imposed on the same object. The Nicaraguan tax structure is very dependent on indirect taxes, which in recent years have yielded between 80 and 90 per cent of total revenue (Table 3).

Table 3.

Revenue Receipts of Government of Nicaragua, Fiscal Years 1951–551

(In millions of córdobas)

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Source: Ministerio de Hacienda y Crédito Público, Presupuesto General de Egresos e Ingresos, 1954–55 (Managua, 1954).

Totals may not equal the sums of the items because of rounding.



Some of the IBRD recommendations—notably the introduction of an income tax and a revised tariff—have since been carried out, but other changes have not yet been made. An income tax law was introduced in December 1952. In the first year of operation, it produced C$6.5 million, which was somewhat less than the C$10 million that had been estimated. In 1954–55, it was expected to yield C$16 million; but even this figure was below the estimate for receipts from taxes on liquor and beer, the largest producers of revenue among Nicaragua’s consumption taxes (Table 3). The property tax is frequently evaded and remains a minor source of revenue; consumption taxes on sugar and soft drinks together provide nearly as much revenue as the property tax.

When consideration was given to the abolition of the exchange surcharges (which eventually became effective on July 1, 1955, as described below), account had to be taken of the relative magnitude of the revenue derived from the exchange system and that raised from other sources. In the two fiscal years 1952–53 and 1953–54, surcharge proceeds plus profits from the exchange spread were equal to about half the receipts from customs duties, the largest single tax source. The estimates for 1954–55 showed that exchange surcharges in that year were still expected to exceed revenue from the income tax.

Total government revenue has increased rapidly in the last few years. Since expenditures have not increased as much as revenue, there have been small surpluses. In 1954–55, however, the budget estimated total receipts at C$182 million and total expenditures at C$209 million. The deficit of C$27 million was to be met from the surpluses realized in earlier years. In March 1955 estimates of both receipts and expenditures were increased by C$15 million, the increase in revenue being expected to come from customs duties and consular fees and from the exchange surcharges that were abolished later in the year.16 Of the increase of about C$92 million in total revenue from 1950–51 to 1953–54, taxes on imports were responsible for C$55 million.

Reforms of july 1955

On July 1, 1955 a new par value and single basic import rate of C$7 was established. A revised tariff went into effect, and the surcharges were removed. Imports are still classified in three categories, which, however, are now used merely for the purpose of applying advance deposit requirements. In addition to absorbing the exchange surcharges, the revised tariff also permitted the abolition of the two 5 per cent taxes on imports and of several other miscellaneous taxes. Revenue from the revised tariff is expected at least to equal, if not to exceed, the revenue previously derived from the old tariff, the surcharges, and the other taxes that have been abolished.

As from July 1, 1955, also, government payments are to be made at the same rate as other payments. An exchange spread still remains, however, for the buying rate of C$6.60 per U.S. dollar was temporarily maintained, with the proviso that the proceeds from the spread of 40 centavos thus left between the buying and the selling rates are to be used to promote domestic production. This spread is the only revenue feature remaining in the Nicaraguan exchange system. Its ultimate removal may depend on factors other than purely fiscal considerations. It may be thought that a buying rate higher than C$6.60 might contribute to inflationary pressure now, but that at some future date exporters might be granted a higher rate, particularly if the principal exports of Nicaragua should encounter serious marketing difficulties. In any event, no further changes in the revenue features of the exchange system are likely until the effects of the new tariff have been observed and its revenue yield determined. Now that the tariff has been reformed and the surcharges have been absorbed, it seems unlikely that the other indirect taxes which are now levied could be relied on for any further significant increase in revenue.

Philippine Republic: Large Exchange Tax

A 17 per cent tax on sales of foreign exchange was put into effect in the Philippine Republic in 1951, following the Bell mission report to the President of the United States. The Bell mission had recommended

That the finances of the Government be placed on a sound basis in order to avoid further inflation; that additional tax revenues be raised immediately in as equitable a manner as possible to meet the expenditures of the Government; that the tax structure be revised to increase the proportion of taxes collected from high incomes and large property holdings; that the tax collecting machinery be overhauled to secure greater efficiency in tax collection. … 17

The country’s finances were in a critical condition, and additional revenue was urgently needed. Several alternative methods were suggested by the mission to secure revenue by methods that would also reduce import demand.

Certain fiscal reforms were accordingly put into effect in 1951 by the Philippine Government. Measures were passed that provided not only for the 17 per cent exchange tax but also for increased taxes on liquor and cigarettes, increased rates of corporate and individual income tax, and a sales tax on imported luxuries. In addition, administration and government account reforms were made.

When the 17 per cent exchange tax was introduced on March 28, 1951, trade and exchange controls had been in effect for over a year. Difficulties had been encountered in the administration of these controls, and they were criticized as a burden to business and as offering opportunities for favoritism. The Philippine authorities believed that an exchange tax would be easier to administer and collect than, for example, an excise tax, which was one of the alternatives suggested.

With the approval of the International Monetary Fund, the exchange tax was adopted as a temporary measure for a two-year period ending in March 1953. It was subsequently extended at various times, the last extension being in June 1955. In contrast to measures in some other countries where the exchange system produces revenue, the Philippine exchange tax was not introduced for another specific purpose, only to become important subsequently as a source of funds. From the beginning, it had the twofold purpose of securing tax revenue and reducing imports. It was expected in 1951 that whatever emergency measures were enacted would be replaced later by some other more desirable form of taxation. In August 1955, at a special session of the Philippine Congress, legislation was passed to eliminate the exchange tax at the end of 1955 and to substitute a special import tax.

The Philippine exchange tax of 17 per cent was levied on the peso value of sales of foreign exchange by authorized agents. Government payments and payments for certain specified imports and invisibles were exempted, and were made at the official selling rate of 2.015 pesos per U.S. dollar. The official buying rate (2.00375 pesos per U.S. dollar) applied to all incoming exchange. Provision was made in the legislation passed in 1951 for the exemption of certain transactions and for refunds on certain other transactions. The exempted transactions were primarily payments for “invisibles” and for machinery and raw materials to be used by new and essential industries. Refundable items included payments for certain imports listed as necessary, e.g., rice, flour, fertilizer, textbooks, pharmaceuticals, etc. In July 1952 the time-consuming refund procedure was abolished, and the list of exemptions was extended to include those items previously subject to refund.

The revenue from the 17 per cent tax in the fiscal years 1952, 1953, and 1954 was 155 million pesos, 115 million pesos, and 126 million pesos, respectively.18 An estimate of revenue in the fiscal year 1955, based on foreign exchange disbursements, is 137 million pesos.19

The data in Table 4 indicate the importance of the revenue from the exchange tax in comparison with revenue from other sources. In the fiscal year 1952, 24 per cent of the total revenue from taxation of 654.8 million pesos (before apportionment to local governments) was obtained from the exchange tax; in 1953 and 1954 the percentage was somewhat smaller (19 per cent).

Table 4.

Revenue of the Philippine National Government from General, Special, and Bond Funds, Fiscal Years 1951–541

(In millions of pesos)

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Source: Central Bank of the Philippines, Annual Reports, 1952, 1953, and 1954 (Manila, 1953–55).

Totals may not equal the sums of the items because of rounding.

Actual figure is 25,071 pesos.

The exchange tax was the largest single source of tax revenue in the Philippines in 1952 and 1954; in 1953, revenue from the income tax was slightly more than that from the exchange tax. While a larger figure is shown in Table 4 for the category “license and business taxes,” this includes several taxes, such as a tax on liquor dealers, percentage sales taxes, an amusement tax, tax on brokers, etc. Receipts from import duties were equal to only about one fourth of the revenue from the exchange tax and only about 6 per cent of total tax receipts in 1954.

The proceeds from the exchange tax accrued to the general government funds. They were utilized for ordinary government expenditures and were not handled in a special manner or for special purposes.

The Philippine exchange tax is a good illustration of the complexity of the considerations involved in finding a substitute, outside the exchange system, for a sizable exchange tax. First, not only were straight revenue considerations involved, i.e., other tax sources which might be utilized; the state of the budget also had to be taken into account. As long as there is a budget deficit, new revenue sources are needed to increase current revenue, not merely to substitute for some existing source of revenue. Second, important balance of payments functions also were served by the exchange tax. Third, the tax probably siphoned off excessive profits by importers in a way that might not have been effectively assured by some other tax even if the revenue had been maintained. Finally, some of the alternative revenue sources might have raised questions involving trade relations with other countries.

The fiscal measures taken in 1951 seem to have had some degree of success. Total revenue from taxation increased from 442.4 million pesos in 1951 to 654.8 million pesos in 1952, or by nearly 50 per cent. It declined somewhat in 1953, but in 1954 it was about the same as in 1952. Certain of the tax measures, including the corporation income tax and stamp and excise taxes (those on distilled spirits, wines, and playing cards), have been extended by the Philippine Government. For 1954 and 1955, personal income tax rates were restored to the higher levels provided in the law which had expired in 1952, but the increased rates were not extended into 1956 by the 1955 session of Congress.

The 17 per cent tax might have been eliminated by increasing over-all taxation. In 1954, total revenue from taxation was about 9 per cent of national income. This is a relatively small amount when compared with the tax revenue of other countries. In the United States, for example, revenue of the federal Government alone was 23 per cent of national income in 1954. Although fiscal revenue in the United States cannot be compared with that of the Philippines, some less industrialized countries have a higher ratio of tax revenue to national income; e.g., budget receipts in Cuba in fiscal 1954 were about 16 per cent of national income.

As in other underdeveloped countries, one of the most desirable ways of raising additional revenue in the Philippines would be through greater direct taxation. The Philippine fiscal system depends heavily on excise taxes (other than the exchange tax) and on license, business, and occupation taxes. In each of the four years, 1951 through 1954, these taxes brought in over half of the revenue from taxation before apportionment to local governments. Although such direct taxes as the income and withholding taxes were increased (and revenue from them in 1954 was 34 per cent greater than in 1951), these taxes, together with the inheritance, war profits, and residence taxes, accounted for less than one fifth of total tax revenues in 1954, while taxes on international trade, i.e., the exchange tax and import duties, were 25 per cent of the total.

The recent history of budget deficits in the Philippines emphasizes the importance of the revenue-earning capacity of the exchange tax. In each year after the war, the national Government had a deficit (with the exception of a slight surplus in 1948) until 1951–52, the first complete fiscal year after the introduction of the exchange tax, when there was a surplus of 73.4 million pesos. In 1953, there was a very small deficit, and the budget for that year could be considered as balanced, but in 1954 there was again a large deficit.

A tax that produced so much revenue as the exchange tax could not be eliminated by reducing budget expenditures. Moreover, a large part of the Philippine budget is accounted for by expenditures that are not likely to decrease and may even increase in the future. In 1951, 1952, and 1953, education and defense accounted for over 50 per cent of budget expenditures, and development expenditures for approximately another 25 per cent. In 1954, development expenditures increased to one third of total expenditures, and defense and education were slightly less than 50 per cent.

The exchange tax was not only a source of revenue; it also helped to check the demand for imports. Although the most effective restraint on imports is imposed by exchange control and licenses, a tax as large as 17 per cent was probably a deterrent to applying for licenses.20 In fact, this was part of the initial purpose of the tax.

With balance of payments deficits continuing and with low external reserves, this added check on imports was an important function of the exchange tax. For this reason, when alternative measures were being considered, revenue considerations alone could not determine the choice; the effect on imports of any alternative revenue measure also had to be taken into account. If it is assumed that taxes which operate directly on imports (e.g., exchange taxes, customs duties, etc.) are more effective in restraining import demand than taxes which operate indirectly on the demand for imports by influencing the level of total income or consumption (e.g., income taxes), then the range of possible alternative measures for the Philippine exchange tax was accordingly narrowed. For this reason, one of the most important alternatives considered, which is discussed below, was the revision of import duties.

The exchange tax may have had certain other effects which had to be taken into account when considering its replacement by any alternative. For example, the exchange tax may have tended to have certain protective effects on particular local industries. Determination of the particular industries or of the amount of the protection involved is always especially difficult when domestic prices of commodities similar to or substitutable for imported commodities are influenced by import and exchange controls as well as by a sizable exchange tax.

The tax may have been a deterrent to exports which contain imported materials. This consideration is undoubtedly not very important for the major exports of the Philippines, which are agricultural products or raw materials. But it might be important for new export industries, particularly in an economy promoting economic development.

The incidence of the tax also had to be considered. At present it is difficult to determine to what extent the tax fell on importers or the extent to which it was passed on to consumers through higher prices. Some figures suggest that importers bore a substantial portion of the tax. In 1951, for example, prior to the tax, the c.i.f. import price index was 6 per cent higher than the 1948–49 average, while retail prices of imported goods were 32 per cent higher. In 1952, following the imposition of the tax, the c.i.f. import price index changed very little (an increase of only 0.1 per cent), but the retail price index of imported goods declined by 5.1 percent.21

The tax might have been a deterrent to foreign investment, since foreign investors had to pay the tax on the remittance of profits abroad. However, investors may have shifted the tax to consumers.

Agreement with united states

The opinion was often expressed that the most promising solution for removal of the exchange tax lay in the possibility of increased duties on imports from the United States. This involved revision of the Executive Agreement with the United States which had been reached in 1946 and which required duty-free treatment for trade between the two countries for 8 years (to July 1954) and then gradually increasing tariffs for 20 years. When the Bell mission of 1950 made its recommendations, it suggested that the agreement with the United States be re-examined. The Special Committee of the National Economic Council of the Philippines, which was appointed for this purpose, recommended revision, stating that “the free trade arrangements can also be considered as a major cause for the Government’s continued financial difficulties … The Executive Agreement, in tying up the hands of the Government with respect to the imposition of tariffs on U.S. products, has removed one major source of revenue which no truly independent state can afford to forego.”22 The Committee also stated that the agreement discouraged the growth of local consumer goods industries, tended to encourage imports, caused a reduction in trade with other countries, and led to instability of the economy.

In July 1954, the duty-free arrangements between the two countries were extended until January 1, 1956; meanwhile, negotiation teams began to discuss the proposed revisions, and in December 1954 an agreement was signed. The revisions were approved by both Governments in mid-1955. One of the provisions was that, beginning January 1, 1956, the Philippines would impose a temporary special import tax, to replace the 17 per cent tax on sales of foreign exchange. Such action has been approved by the Philippine Congress. The items which have been exempt from the exchange tax will also be exempt from the import tax. The import tax will apply only to merchandise items, whereas the exchange tax has applied also to invisibles. The import tax is to be 17 per cent for the first year; it is to be reduced by 10 per cent of the initial rate each year, beginning with January 1, 1957, until it is eliminated on January 1, 1966. The importance of the revenue yield of the exchange tax is emphasized by one of the provisions of the import tax law: if the total revenue derived from the customs duties and from the special import tax on goods imported from the United States is less in any calendar year than the proceeds from the exchange tax on such goods during the calendar year 1955, the Philippine President may suspend the reduction of the special import tax for the next calendar year, and may increase the special import tax on all goods coming from any country to any previous rate which is considered necessary to restore revenues to the 1955 level. Other provisions in the revisions to the U.S.-Philippine agreement also are significant in respect of revenue; for example, taxes on exports are no longer prohibited, the timetable for applying U.S. duties on imports from the Philippines has been expanded, and, most important, the application of Philippine duties on imports from the United States has been accelerated. Also, the agreement provides for the removal of most of the absolute quotas on Philippine goods entering the United States.

Although the exchange tax has been removed and a substitute measure imposed, additional revenue is needed to meet rising government expenditures. The most recent annual report of the Central Bank of the Philippines, written when it was apparent that the agreement with the United States would be revised, recommends, among other things, that the Philippines re-examine the present tax exemptions for new and essential industries, revise the tariff, and undertake a thorough economic study of the fiscal system.

Venezuela: Penalty Export Rate

The experience of Venezuela illustrates the situation that arises when foreign companies are not required to surrender the exchange proceeds earned from their exports, but meet their local currency requirements for operating expenses by exchanging part of their foreign exchange earnings at a special appreciated rate; this rate is sometimes called a “penalty export” rate, since it is less than an “equilibrium’’ rate or than the par value or official rate. For their local currency requirements, foreign oil companies in Venezuela surrender export proceeds at the rate of 3.09 bolívares per U.S. dollar, whereas the Venezuelan par value is 3.35 bolívares per dollar. If the total amount of foreign exchange sold by the oil companies to the Central Bank in any given year exceeds the volume of exchange sold by the Bank on the internal market, an even lower rate, that is, a still more appreciated rate, 3.046259 bolívares per dollar, is applied to the difference. This rate is applied by means of a repayment to the Bank by the oil companies of bolívares equivalent to the excess of purchases over sales multiplied by .043741, the difference between the two rates. The 3.046259 rate, which was introduced during World War II, corresponds to the old gold import point.

The application of penalty rates may produce revenue for the Government if the foreign exchange so acquired is subsequently sold at a more depreciated exchange rate. It is possible, of course, that penalty export rates may yield no actual revenue to the Government; for example, when the foreign exchange acquired is used for government foreign exchange requirements calculated at the same rate of exchange. In any event, the penalty rate may be regarded as equivalent to a flat-rate tax on the domestic expenses of the company.23 Any penalty rate may be considered a “tax” in the sense that certain income is withheld from particular exporters by making the exchange requirements imposed upon them less favorable than those imposed on other exporters, or by applying to them a rate more appreciated than is paid by importers. Hence, if penalty rates on the transactions of foreign companies are eliminated, substitute measures for equivalent revenue or equivalent taxation applied to the income of foreign companies are often required.

The official selling rate for the bolívar is 3.35 bolívares per U.S. dollar, the same as the par value; the buying rate fluctuates around 3.325 bolívares per dollar, and applies to all purchases of exchange except those from the petroleum companies and from cacao and coffee exporters. The Central Bank sells most of its exchange to commercial banks at the interbank rate of 3.335 bolívares per dollar, and the commercial banks resell this exchange to the public at 3.35 bolívares per dollar. Thus, there is a spread of 0.26 bolívares per dollar between the exchange purchased from oil companies at the rate of 3.09 bolívares per dollar and exchange finally sold to the public. Of this spread, a small portion—.015 bolívares per dollar—accrues to the commercial banks.

Some of the exchange acquired by the Central Bank is used for government payments at the preferential rate of 3.09 bolívares per dollar. Moreover, the Government may use some of the local currency to pay more favorable rates of exchange to cacao and coffee exporters, depending on world prices for these commodities. The proceeds of exports of coffee and cacao are surrendered at the rate of 3.325 bolívares per dollar; but as international prices of cacao and coffee decline, these rates may go to 4.25 for cacao and unwashed coffee and to 4.80 for washed coffee. When these special rates are used, this disbursement of local currency may be considered as a way of utilizing the revenue from the exchange system. The favorable rates for coffee exports have not been used recently, however, since the international coffee price has been higher than the price to which the premium rates apply; therefore, for the years considered here, the special rate has applied only to cacao.

Total sales of exchange by the Central Bank in 1953 were equivalent to US$721.1 million.24 It seems reasonable to assume that these were sales of exchange purchased earlier from the oil companies. Central Bank purchases of exchange in any year from sources other than the oil companies are very small, and its purchases of exchange from the oil companies during 1953 exceeded its total sales; therefore, it would be logical to assume that in effect it was selling exchange which it had purchased at the cheapest rate. Further, there is a possibility that exchange purchases from the oil companies in any year may be carried over and sold during subsequent years. At a spread of 0.26 bolívares per dollar, the revenue earned on $721.1 million would be 187.5 million bolívares.

The arrangement for repayment by the oil companies of the difference between 3.09 bolívares and 3.046259 bolívares when purchases from the oil companies exceed sales of exchange in the internal market produced further revenue for the Government in 1953. If the internal market in which the Central Bank sold exchange to private importers is measured by reference to its sales to commercial banks and to other nongovernment purchasers (less the Central Bank purchases of foreign exchange arising from coffee and cacao exports, as stated in the agreement with the oil companies), and the foreign exchange resulting from the sale by the Government of petroleum accepted as payment of taxes in kind is excluded from purchases, the excess of oil company sales of exchange over Central Bank sales was $114 million. This would mean an additional local currency payment by the oil companies to the Central Bank of 5.0 million bolívares, and would raise the total revenue figure to 192.5 million bolívares.

The Central Bank usually transfers its exchange profits to the Government toward the end of the calendar year. The reported figure for this transfer in 1953–54 was less than 192.5 million bolívares. Part of this discrepancy may be explained in terms of certain deductions. It may be estimated that 9.7 million bolívares accrued to the commercial banks through purchases at the interbank rate; 19.2 million bolívares may be taken as the cost of government exchange purchases;25 and 9.2 million bolívares was the cost of subsidizing purchases of cacao export proceeds. Also, the Central Bank receives a fee for its services which is estimated to have been 1.2 million bolívares in 1953.

With allowance for these deductions, the approximate “profit” on exchange operations in 1953 would be 153.2 million bolívares. Similar calculations for 1951 show a net profit of 126.2 million bolívares and for 1952 of 140.7 million bolívares. The deduction on account of government payments at the preferential rate is, of course, to be regarded as merely a nominal “loss” in the sense that potential profits from the sale of exchange to the public did not arise. The deduction should be made, however, since the gross estimates of receipts (before such deductions) involve the assumption that all foreign exchange purchased from the oil companies is sold at a spread of 0.26 bolívares per dollar.

These figures are a closer approximation to the Venezuelan record of profits on exchange operations. The estimate for 1953 exceeds by 16.3 million bolívares the amount reported as being transferred from the Central Bank to the national Government in 1953–54, and there are similar discrepancies of about 10 per cent in 1951 and 1952. The fact that the calculations above were made on the basis of the Central Bank’s total exchange purchases from oil companies may account for part of the difference. Also, it may be that a portion of exchange profits is not transferred to the Government but is retained as a reserve in the event that subsequent purchases may be substantially greater than sales. Hence, profits transferred to the Government may tend to be less than those currently earned.

The importance of the revenue from the Venezuelan system of penalty rates may be gauged by comparing it with the revenue from other sources. The estimate of 192.5 million bolívares for gross receipts in 1953 is equivalent to about 7 per cent of 1953–54 total revenue; and the “net profits” estimate of 153.2 million bolívares is equivalent to about 6 per cent. As shown by Table 5, exchange profits reported as “transferred to the Government” accounted for approximately 5 per cent of total national revenue in recent fiscal years.

Table 5.

Accounts of the Venezuelan National Government, Fiscal Years 1951–54

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Source: Ministerio de Hacienda, Boletín de Información Fiscal (Caracas).

Including 76.4 million bolívares applicable to the 1949–50 budget.

Including 123.4 million bolívares applicable to the 1950–51 budget.

Including 140.8 million bolívares applicable to the 1951–52 budget.

Including 112.5 million bolívares applicable to the 1952–53 budget.

Compared with other tax sources, revenue from exchange operations is not large. The three most important tax sources—petroleum royalties, the income tax, and customs revenue—together account for nearly 80 per cent of total national revenue. The revenue from exchange operations is only a little more than one-fourth that from customs duties.

The relatively small revenue earned suggests that this aspect of Venezuela’s penalty export rate is not very important, especially since Venezuela has had a Treasury balance as a result of earlier budget surpluses. Neither has the penalty rate any balance of payments purpose. The present exchange rate structure must indeed be regarded as one of the fiscal devices whereby Venezuela is attempting to reduce its extreme dependence on the oil industry. Although the economies of several countries are “one-crop export economies,” the degree of dependence is seldom so great as in Venezuela. The oil industry provides not only about 98 per cent of the country’s official foreign exchange receipts, but also more than 60 per cent of the government revenue. The taxes imposed on the petroleum companies include exploration taxes, royalties and income taxes, and customs duties, in addition to the penalty exchange rate. In 1953 the oil companies paid taxes of 1,486 million bolívares, or 56 per cent of total government revenue for 1953–54;26 if revenue from the exchange system is included, the percentage is about 61.

The present exchange structure is thus designed to build up other industries and agriculture—sometimes referred to as the “sow-the-oil” policy. Partly because of the inflationary effects of the high wages of oil employees, costs of production in other industries are high. In addition to the provision for subsidizing coffee and cacao through the exchange system and the granting of some direct subsidies, other measures have been taken to increase agricultural production, to provide electricity in certain areas, to encourage immigration of agricultural workers, and to provide irrigation projects. Funds set aside in the budget for investment go to such agencies as the Banco Agrícola y Pecuario, the Corporación de Fomento, and the Instituto Agrario Nacional, where it is made available for productive purposes.

In general, government expenditures are of great importance in the Venezuelan economy. National budget expenditures in 1952–53 were equal to 26 per cent of the national income in 1952. A large portion of government expenditures is spent on development, public works, and similar activities. In the 1954 budget, 123.1 million bolívares was allotted to the Department of Development and 730.1 million bolívares to the Department of Public Works; the allotments to these two departments amounted to about 35 per cent of total budgeted expenditures. Large allowances (a total of 19 per cent) were also made to the Departments of Health and Social Welfare, Education, Labor, and Agriculture.27

As revenue has increased, expenditures for activities related to development have mounted. Revenues increased by 50 per cent between the fiscal years 1943 and 1945, following the enactment of the income tax law and the hydrocarbon law. Since then, increases in income tax rates have been made in several years, and the collection of petroleum royalties in kind for subsequent resale at premium prices became effective in 1946–47.28

Venezuela has an inheritance and gift tax and an income tax. Income tax rates are quite low, however, with the basic tax rate ranging from 1 per cent on wages and salaries of residents to 4 per cent on nonresidents’ earnings in noncommercial professions, and the exemption limit is fairly high. There is also a progressive surtax rising from 1½ per cent on incomes over 9,000 bolívares to 26 per cent on incomes over 28 million bolívares, and, finally, there is an “additional tax” on net income from mining or petroleum.29 (Among the provisions of a law effective January 1, 1956 were an increase to 7 per cent of the tax rate on nonresidents’ earnings in noncommercial professions and removal of the 9,000 bolívares exemption for payment of the surtax, although certain exemptions to the payment of the surtax for natural persons were provided.)30 In the last three years, revenue from direct taxes increased by about 65 per cent, while total revenue rose by 26 per cent (Table 5).

Under the circumstances of increasing revenues and concentrated development, the exchange rate structure assumes a meaning which goes beyond straight revenue considerations. It becomes involved in a complex of fiscal considerations relating to the economic structure and future growth of the economy. Given these objectives, substitute measures for the penalty export tax necessarily involve also the whole complex of relations between Venezuela and the foreign oil companies.

If the penalty rate were removed and no offsetting taxes were imposed, there would be a loss of foreign exchange to the Government, since the foreign companies would need to convert fewer dollars to obtain the local currency with which to cover their local currency expenditures. Also, the incidence of the present tax structure would probably be shifted to other sectors of the economy, which may be less able to pay.

On the other hand, some factors suggest that eventual elimination of the penalty rate would not present insurmountable problems. If the oil companies were to receive the same rate as other exporters (other than cacao and coffee exporters), the Government might recoup some part of the revenue loss under a special provision of the income tax law which imposes the “additional tax” mentioned above. The law provides that taxes paid by any foreign oil company to the Government shall be deducted from the company’s total profits, and that the company will then pay to the Government 50 per cent of the excess of the remainder over the taxes already paid. This means that at least 50 per cent of the oil companies’ profits are paid to the Government. A specific illustration suggests how the law operates. Assume company profits of 100 and taxes of 30. When taxes are deducted from profits (100 minus 30), the difference, 70, exceeds taxes paid by 40. Fifty per cent of 40, i.e., 20, is added to the taxes paid; therefore, 50 or one half of total profits, goes to the Government. If total profits had been only 40, the remainder would be 10, or less than the taxes paid, and no further payment would be required. Therefore, it would appear that, if company profits in domestic currency were to increase as a result of rate unification, at least half of the increased profits would go to the Government. Admittedly, however, this increase in tax revenues from foreign companies is less direct, and may be smaller, than the revenue obtained from application of the penalty rate.

As local industries develop, the oil companies may also make additional local purchases. Import statistics show that in 1953 the petroleum companies imported about 19 per cent of the value of Venezuela’s total imports.31 Some of these imports might eventually be provided in part by local industries. In this connection it is interesting to note that only a little more than half the value of total petroleum exports is converted by the petroleum companies into bolívares, and that this proportion has decreased sharply since the early postwar period. Although the total value of exports of petroleum increased by about 242 per cent between 1946 and 1953, the exchange negotiated increased by only some 150 per cent.

Rate unification would presumably be accompanied by a new agreement between the Government and the oil companies, which might well provide for additional taxes on the oil companies.


The analysis of the recent exchange history of Cuba, Nicaragua, the Philippine Republic, and Venezuela has illustrated the frequent use of multiple exchange rates as a source of revenue when the imposition of other forms of taxation is impeded by administrative and other difficulties. Generally, in countries that use multiple rates, the easiest alternative source of revenue would be export and import taxes. But while the economic effects of these taxes may be substantially the same as the economic effects of multiple rates, there are a number of reasons why some countries prefer to utilize multiple rate practices rather than impose additional export and import taxes. The imposition or alteration of import and export taxes generally requires legislative action, while multiple rates are often administratively determined. International arrangements and commitments frequently limit the use of tariff or other import taxes. In order to raise the same amount of revenue, export and import tax rates would in many countries have to be raised to impractically high levels. Indirect taxation has already been utilized to such an extent in some of them that it is considered better to explore the possibilities of direct taxation as a means of obtaining further revenue; while exploring these possibilities, a country may prefer to use some other device as a temporary revenue measure rather than resort to increased export and import taxes, which may be regarded as having more permanent implications.

If, on the other hand, countries which rely on multiple rates attempt to extend direct taxation, they may be confronted with new economic and administrative difficulties. Countries for which multiple rates are important revenue earners are generally comparatively underdeveloped, with the great majority of the population receiving very low incomes. Under such circumstances, fiscal devices that are the major revenue earners for more developed economies may not be practicable. The monetary sector of the economy is likely to be limited, many people living mainly on their own production and resorting to barter where exchange is necessary. Direct taxation aimed at bringing in substantial yields might have to take the form of taxes in kind, which would create further difficult problems. Moreover, wide disparities in income distribution may make income taxation an unsuitable fiscal instrument in underdeveloped countries. In the absence of a substantial middle income group, there may not be a sufficiently broad base for an effective income tax system. There are few taxpayers with high incomes and, if rates are too high, it may be feared that the incentive to accumulate capital for investment, which has become of increasing concern to these countries in recent years, will be impaired.

Direct taxes, including an income tax, are imposed in the countries studied in this paper, but the returns have usually been notably less than was expected when the legislation was passed. Administrative difficulties—an illustration of which is given above in the section on Cuba—explain in part these disappointments. Those able to pay and required to do so by law may evade the tax. In some countries, stricter tax enforcement with stiff penalties for evasion seems to be needed.

A recent report by the United Nations states that, in principle, the development of income and other direct taxes would be a satisfactory and equitable method of securing a tax structure that would be capable of controlling inflationary pressures arising from public spending, that would extend the incidence of taxation, and that could be chosen so that growth of revenue would accord with the progress of development. Yet the report concludes that “administrative difficulties alone are likely to prevent any great or early progress in this direction in most countries except such as may be secured by the more efficient use of existing tax machinery.”32 It is significant that Venezuela is the only country among the four studied here where receipts from exchange profits have not exceeded receipts from income tax.

Some countries have had exchange taxes for a long time. As pointed out above, Cuba has had an exchange tax since 1925. Although the decree for the present agreement between the Central Bank of Venezuela and the oil companies was promulgated in 1944, the oil companies, by agreement with the Government, have since 1934 exchanged part of their foreign exchange earnings at an appreciated rate. Taxpayers are thus accustomed to being taxed through the exchange system, and the Government may hesitate to alter the arrangement. The changes that would be necessary if new administrative machinery had to be set up for the collection of alternative taxes might have disruptive effects.

In contrast to the administrative difficulties of direct taxation, the administration of multiple rates is easy. To obtain revenues through the exchange system, a country does not need a well-trained staff of civil servants. The matter can simply be handled through the banking system. In underdeveloped countries trained personnel are scarce, and the banking system may be considered less susceptible to pressure.

Even when the exchange tax or exchange spread is very small, multiple rates are, generally, not merely a small marginal source of revenue; the revenue collected is sizable, even in comparison with total revenue, but especially in comparison with revenue from other individual tax sources. In many countries, only customs duties are a more important single source of revenue. Revenue yields from any individual excise tax, such as tobacco, liquor, and gasoline taxes, individual business taxes, license fees, motor vehicle fees—not to mention direct taxes, such as income, property, inheritance, and estate taxes—tend, in general, to be much smaller than exchange profits. Usually, it is only when yields from all excise taxes, or all business and occupation taxes, or all indirect taxes other than import duties, are grouped together that the yields from these sources may be comparable with the yields from multiple exchange rate systems. Even when this grouping is made, the yields from exchange systems are still significant. Their contribution to the national government’s total budget revenue ranges from about 5 per cent in Cuba to about 25 per cent in the Philippines.

Even when receipts from exchange profits are relatively small, they may have more importance than might at first appear, for they may bring in considerably more revenue than many other single sources. In some countries—for example, in Cuba—total revenue is built up from a large number of sources, no one of which is of great significance. In Nicaragua the situation has been similar. In 1953–54 almost three fourths of the total revenue came from numerous small sources, the receipts from each of which were smaller than the receipts from exchange surcharges alone.

If revenue from the exchange system tends increasingly to become an integral part of the revenue system, the elimination even of relatively minor multiple currency practices may make necessary a thoroughgoing fiscal reform. Even where multiple rates have been adopted for purposes other than revenue, the revenue which in fact they yield may constitute a reason for maintaining them after their original justification has disappeared. This is all the more likely since countries that use multiple rates have in recent years been faced with an increasingly urgent need for additional revenue.

In all of the countries considered in this study, there have been rapid increases in government expenditures in the past few years. Development and defense are the outstanding items that have caused these increases. As a result, countries that instituted multiple currency practices for reasons other than revenue have eventually found their revenue-yielding features increasingly important and, accordingly, the problem of finding alternative sources of revenue before multiple exchange rates can be eliminated has become more acute.

In most cases, even where only small sums are involved, the installation of alternative sources of revenue is likely to require fiscal reform. All the other readily available sources have usually been used to the full; higher rates for other forms of taxation may not yield higher revenue; the introduction of a few new taxes (usually excise taxes) will generally not yield sufficient revenue; the fiscal system is already burdened with the number of indirect taxes which produce little revenue. If there are any sources from which additional revenue can be raised quickly, they are more likely to be used to ease budgetary deficits or to help finance further additional expenditures than to replace revenue from multiple rates. The one alternative which seems feasible is additional import and export taxes. Administration through the customs may be almost as simple as through the central bank, and the amounts of revenue raised and the economic implications and effects on the balance of payments would probably be very similar. However, even such a shift may often require a fiscal reform, except where the revenue-producing multiple rate is a simple, generally applicable, exchange tax. A general exchange tax might then conceivably be converted easily into a general import or export tax. However, if much of the exchange tax revenue comes from its application to invisibles and capital transactions, the yield of a general export or import tax imposed as a substitute might be inadequate; where the revenue from the multiple rate system is derived from more complex arrangements, a shift to import and export taxes might require the imposition of several such taxes and much higher tax rates, perhaps with some commodity differentiation, and these shifts might themselves almost amount to a fiscal reform. In any event, expanding revenue requirements often indicate the desirability of fiscal reform, and the elimination of the revenue features of multiple currency practices must, therefore, usually be considered in a wider setting.

In considering the relative merits of multiple rates and of alternative forms of taxation, attention has also to be given to the problem of incidence. In general, the incidence of multiple rates that produce revenue is similar to that of import or export duties. Under certain conditions of elasticity of supply and demand, part of the burden of import (or export) duties can be shifted abroad. It is doubtful, however, whether this possibility has much practical importance for the countries considered in this study. The world elasticity of demand for the products of small countries, whose exports are only a relatively small proportion of total world supply, is probably large, and perhaps can be regarded as infinite. Similarly, the world elasticity of supply of the goods imported by small countries may be regarded as large. Furthermore, at present, with inflationary conditions and large demand for imports for development in most of the countries that use multiple rates, the import demand of those countries is relatively inelastic, and most of their exports consist largely of raw materials, the supply of which is also relatively inelastic. Under these circumstances, multiple rates may have the effect of siphoning off the windfall profits of local importers or of preventing higher incomes from accruing to local exporters. In any event, the relative incidence of any revenue instrument upon foreign and domestic groups must always be taken into account when comparing the fiscal implications of a multiple rate practice and of an alternative source of revenue, and governments are naturally especially concerned with the purely domestic incidence of their taxation measures. These considerations, no less than the economic and administrative obstacles associated with alternative forms of revenue, may increase the difficulties of replacing revenue obtained from multiple rate systems.

In order to be an effective substitute, any alternative source of revenue, or series of alternative sources, must bring in at least as much revenue as the present exchange system. In general, no one substitute tax by itself is likely to be adequate. Usually, a series of tax measures is necessary, and this conclusion may be reinforced by other considerations connected with the incidence of taxation and by the fact that multiple rates often serve more than one purpose. The “alternative measure” thus becomes a series of alternative measures, possibly involving the introduction of several new taxes, a revision of tax rates and of the bases of several existing taxes, a revision of the tariff, and tighter and reformed fiscal administration. In such a situation, the elimination of the revenue aspects of multiple rates is necessarily closely geared to a thoroughgoing fiscal reform rather than to the introduction of any one particular new or revised tax. This means, further, that, in analyzing the relative merits and disadvantages, or the economic effects, of multiple exchange rate systems as sources of revenue, a comparison with any specific form of tax, e.g., excise tax, customs duty, consumption tax, income tax, is usually less appropriate than a comparison with a given combined series of alternative taxes.

The questions that arise in a consideration of alternative sources of revenue are likely to be questions of substance and not merely of the form of taxation. It is sometimes contended that a shift from an exchange tax to another type of tax would be merely formal, and that the alternative would tend to have the same substantive economic effects. However, if the shift requires a group of alternative taxes, the economic effects are not likely to be identical; indeed, a series of tax measures might be devised the economic effects of which, in combination, might be more desirable than the economic effects of the exchange practice. Further, when a series of tax measures is considered as a whole, the disadvantages of any particular type of measure become a less important reason for not replacing exchange revenue with tax revenue. It may still be proper to resort to certain taxes, even if their imposition creates difficulties. Any analysis of revenue alternatives necessarily involves an analysis of the entire fiscal system and of its prospective tax and revenue sources, and cannot be limited to the economic effects or implications of any particular type of tax.


Miss Sherwood, research assistant in the Multiple Currency Practices Division, is a graduate of George Washington University.


In August 1955, the Philippine Congress passed legislation to eliminate at the end of 1955 the 17 per cent exchange tax and to substitute a special import tax.


Edwin R. A. Seligman and Carl S. Shoup, A Report on the Revenue System of Cuba (Havana, 1932), p. 304; Roswell Magill and Carl Shoup, The Cuban Fiscal System, 1989, p. 102.


Foreign Commerce Weekly (Washington), June 27, 1955, p. 4.


International Bank for Reconstruction and Development, Report on Cuba (Washington, 1951), p. 667.


Ibid., p. 558.


International Financial Statistics (Washington), October 1955, and Tribunal de Cuentas, Havana.


International Bank for Reconstruction and Development, op. cit., p. 671.


Law-Decree No. 548, November 20, 1952 (published in Gaceta Oficial, Havana, November 22, 1952).


Ministerio de Hacienda y Cre’dito Público, Presupuesto General de Egresos e Ingresos, 1952–53 (Managua, 1952).


Statistical data used for the computations in this section are from Revista Trimestral del Banco Nacional de Nicaragua (Managua), 1952, 1953, and 1954 issues, and information from the National Bank.


If it is assumed that surcharges were not paid on government imports, actual sales of exchange in 1952 for private imports of commodities in List I (essential commodities) amounted to the equivalent of US$21.7 million; for those in List II, to US$6.5 million; and for those in List III, to US$3.2 million. In 1953, the amounts were US$26.6 million, US$6.2 million, and US$4.3 million, respectively; and in 1954, they were US$35.6 million, US$7.3 million, and US$4.8 million.


These estimates have been made on the basis of actual sales of foreign exchange (footnote 11) rather than on data for current imports, and include some sales of exchange to pay for past imports. Details of the estimates are as follows:

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Message of the President of Nicaragua to the National Congress (Managua), May 1954.


The exact amount of sales of exchange to the Government in 1954 at the C$5 rate is not known; however, total sales of exchange to the Government were more than this amount (for visibles only, US$7.1 million) and the 1950 exchange law specified that only 10 per cent of total exchange receipts was to be sold to the Government at the C$5 rate. For this reason, 10 per cent of total exchange receipts has been used as the amount sold at the C$5 rate.


International Bank for Reconstruction and Development, The Economic Development of Nicaragua (Washington, 1953), p. 326.


Bank of London & South America, Fortnightly Review (London), April 16, 1955, p. 228.


Economic Survey Mission to the Philippines, Report to the President of the United States (Washington, October 9, 1950), pp. 3–4.


Central Bank of the Philippines, Annual Reports, 1953 and 1954 (Manila, 1954–55).


This estimate was derived as follows from data in the Central Bank News Digest (Manila):

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Prior to June 30, 1953, the Philippines had an import licensing system. After that date, the Central Bank took over the administration of the licensing system, and an application for a letter of credit is now considered to be an application for a license to purchase foreign exchange for the related imports.


Central Bank of the Philippines, Annual Report, 1952 (Manila, 1953), p. 14.


Ibid., p. 402.


For a further discussion of the tax, exchange, and other features of penalty rates, see W. John R. Woodley, “The Use of Special Exchange Rates for Transactions With Foreign Companies,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 254–69.


The statistical data used in these computations are from Banco Central de Venezuela, Memoria, 1951, 1952, and 1953 (Caracas, 1952–54).


Government exchange purchases amounted to US$73.89 million: $51.27 million represented purchases by the national Government; $0.32 million, purchases by the governments of the federal district and states and federal territories; and $22.3 million, purchases by other government agencies, e.g., Banco Agricola y Pecuario.


Banco Central de Venezuela, Memoria, 1953 (Caracas, 1954), pp. 105–106.


Ministerio de Hacienda, Boletin de Información Fiscal (Caracas), July 1954.


International Bank for Reconstruction and Development, Report on the Economy of Venezuela (Washington, January 1949, mimeo.).


Department of Commerce, Investment in Venezuela (Washington, 1953).


Foreign Commerce Weekly (Washington), September 5, 1955, p. 6.


Banco Central de Venezuela, Memoria, 1953 (Caracas, 1954), p. 82.


Economic Commission for Asia and the Far East, Economic Survey of Asia and the Far East, 1953 (Bangkok, 1954), p. 19.